The role of Stock Exchange in economic development

The role of Stock Exchange in economic development

1. It provides a ready capital market in which buyers and sellers of securities conclude their deals and make investment liquid.
2. The stock market through market forces of demand and supply determine price of different securities.
3. The stock market is a barometer of the economy. The stock exchange shares prices move with the general trend in the economy, mostly they follow the economic cycle.
4. They improve corporate governance. The stock market improves management standards and efficiency in order to satisfy the demand of shareholders.
5. The stock market provides a medium through which the government can absorb excess liquidity in the economy by issuing securities at favorable interest rates and hence reduce inflation.
6. The government can raise capital for development project.
7. The government and local authorities may decide to borrow money in order to finance projects such as roads construction or housing., these projects are usually funded by bonds.

8. When the government or local authority issues bonds, it may reduce the need to tax people in order to finance development.
9. The stock market index is an important indicator of economic performance.
10. Stock market is used to mobilize saving for investment i.e stock exchange is important in any economy because it acts as channel through which savings are invested to reduce income inequalities.

Reasons why many firms are not quoted in stock exchange market
1. Most companies operating in Kenya are owned by families who value their control such cannot go public as this dilutes their ownership.
2. Going public entails a lot of secrecy to the public because such companies are required to publish annual financial statements and also allow shareholders to inspect statutory books, list of shareholder, list of
directors, creditors etc.
3. Going public is expensive as means of raising finance because of floating cost. Which include under writing, advertising, brokers commissions, legal fee for receiving banks etc
4. Some companies in Kenya are subsidiaries of multinational whose parent companies are quoted in other stock markets.
5. Going public entails a lot of formalities on the part of companies concerned. These formalities include the
a. Capital market formalities
b. preparing a prospector
c. Arranging & paying auditors
d. Compiling the companies five years audited Profit & loss accounts
6. Some firms avoid stock market because of the rigid rules and regulations
7. A highly profitable company may want to retain profits for expansion while public as shareholders may demand dividends.
8. Most companies in Kenya do not maintain proper book of accounts and as such cannot convince the public to buy their shares if their performance is questionable.

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